Credit Derivatives go electronic
Credit Derivatives go electronic.Key index and single name CDS products migrate from OTC to exchange traded products.
Business Impact
- Transparent pricing, valuation and public market data on CDS products
- Potential STP for order routing, execution, margin, confirmation & settlement processes.
- Reduced processing costs via automation of key processes
- Reduced spreads per trade
- Increased trading volume & time (23hrs x 5days/week)
- Migration of OTC positions to exchange traded positions (especially on buy-side: hedge funds, asset managers)
Technology Impact
- Interconnectivity to major exchanges for CDS trading (EUREX,CME) via order routing gateways
- Real time market data (quotes, spreads, market depth, executions/fills)
- Increased trading volume
Eurex will start trading in credit futures in March 2007
European exchange Eurex will start futures trading in iTraxx index beginning March 27, 2007. Additionally, trading will start at some date in future on the segments of iTraxx index too.
The Eurex iTraxx® credit futures will closely mimic the risk structure of credit default swaps traded in the over the counter (OTC) market. Trading on Eurex will involve Eurex Clearing as central counterparty thereby reducing the counterparty and systemic risk and adding to the benefits the product will offer to users.
The contract will be based on the 5 year series, with a fixed coupon and semi annual maturity dates in March and September. The contract size is EUR 100,000; the tick size is set at 0.005 percent translating into 5 euros per tick. It will be quoted in percent with three decimal places. The product will be cash settled, with reference to the iTraxx® index values of IIC.
In the case of a credit event, cash settlement of the single name entity will be made with reference to the ISDA CDS protocol. The Eurex iTraxx® Europe futures contract will be supported by designated market makers, ensuring liquidity from launch.
This is claimed to be the world's first exchange traded credit derivative product.
In the meantime, Chicago Mercantile Exchange has also reported that it will start trading in credit event futures in the 1st quarter of 2007. Regulatory approvals, it seems, are still pending.
- CME: specifications of the Credit Event Futures contracts
- CME: Whitepaper on Credit Event Futures trading & hedging strategies
Questions or comments, contact our subject matter expert: Victor Smith [victor7@bizanalyst.net]
Labels: CBOT, CME, credit derivatives, credit futures, derivatives, electronic trading, EUREX, exchange, LIFFE, market gateway, OTC, risk management, technology, trading
posted by Victor Lloyd Smith @ 4:09 PM
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